In 2011, Oregon Gov. John Kitzhaber faced a vexing problem: The state had a $2 billion hole in its Medicaid budget and no good way to fill it.

He could cut doctors’ pay by 40 percent, but that might lead them to quit Medicaid altogether. He could drop patients or benefits, but that would only compound costs in the long run. A former emergency room doctor, Kitzhaber remembers culling the Medicaid rolls in the 1980s, when he served as a state senator.

“When I went back home, and went back to the emergency department, I saw a couple of people who came in who lost coverage under that decision,” he said. “One of them was a guy who had had a massive stroke. These people don’t disappear.”

So Kitzhaber did something many have done in desperate times. He made a bet that Oregon could not afford to lose.

The deal Kitzhaber struck was this: The Obama administration would give the state $1.9 billion over five years to patch the budget hole.

The catch: Oregon’s Medicaid program must grow at a rate 2 percent slower than the rest of the country, generating $11 billion in savings over the next decade. If it fails, the federal dollars disappear.

Oregon is pursuing the Holy Grail in health-care policy: slower cost growth. If it succeeds, it could set a course for the rest of the country at a pivotal moment for the Affordable Care Act. Under the law, many states will expand Medicaid programs to cover everyone below 133 percent of the federal poverty line, adding 7 million Americans to the program in 2014.

"For the last 30 years, both the private and public sector have done the same things to manage health-care costs. They've cut people from coverage, cut payment rates or cut benefits. It's been 30 years of doing that, and we haven't solved the problem."

— Bruce Goldberg, Oregon Health Authority director

In Oregon alone, Medicaid is expected to enroll 400,000 new patients by 2022, nearly doubling its current numbers.

The state has come to realize that Medicaid is not a bottomless bucket of money. So it strives for what health policy experts call “the triple aim": higher-quality care and better outcomes, at a lower cost.

“Oregon is trying to change the way that health care is delivered with incentives to deliver smarter, better care, instead of just imposing budget changes that cut back on health care,” said Cindy Mann, director of the Center for Medicaid and State Operations. “It’s very exciting.”

LIKE A PAYDAY LOAN
Under the deal, Oregon does not get a lump-sum payment. Instead, the federal government doles out the $1.9 billion over five years. If the state cannot deliver cost savings up front, while hitting certain quality metrics, it’s cut off.

“In terms of cost-control experiments, the likes of this are something we have never seen in health care,” said John McConnell, a health policy researcher at Oregon Health & Science University. “The natural questions are: Is it going to work? Is the state going to fix the budget? And if they do fix the budget, how are those savings accomplished?”

As Kitzhaber sees it, failure isn’t an option. The state’s Medicaid program needs that $1.9 billion to make ends meet now, even if it means paying big dividends back to the federal government later. It’s not unlike a payday loan, with a quick influx of cash and a large obligation to follow.

The phone started ringing, Kitzhaber said, when he landed that $1.9 billion. Other states wanted to know the trick. Then he explained what he committed to.

“We got a lot of calls, things like ‘How did you get all that cash and how can we get some?' ” he said. “They never called back.”

THE BEND SOLUTION
Research has found that when Medicaid premiums rise by 1 to 5 percent of an uninsured family’s income, their odds of participating drop from 57 to 18 percent.

“For the last 30 years, both the private and public sector have done the same things to manage health-care costs,” said Bruce Goldberg, the Oregon Health Authority director who oversees the Medicaid program.

“They’ve cut people from coverage, cut payment rates or cut benefits. It’s been 30 years of doing that, and we haven’t solved the problem.”

This time, Oregon wanted to try something different. A small experiment gave the state clues about a better way. It took place at St. Charles Hospital in Bend, a mountain town known for snowboarding, white-water rafting and microbreweries.

St. Charles noted that 144 patients tended to use the emergency room the most. Taken together, they averaged 14.25 trips each over 12 months. These patients drove much of the area’s Medicaid spending.

Researchers focused on them.

More than half did not list a primary-care doctor. Some didn’t even have a preferred hospital: 27 percent had visited multiple ERs. The majority had unmet mental health needs, even though most had Medicaid, which provides mental health coverage.

Providers in Bend stationed community health workers in emergency rooms, who could help assess why patients had turned up.

Behavioral health specialists were embedded in clinics that traditionally dealt only with physical issues, in order to give patients a point of contact when they walked in the door.

The program was not a complete success. Of the 144 patients in the study, only 62 percent agreed to work with a community worker on a plan for their care. The others proved difficult to track down or did not want to participate.

Still, it did significantly change how the most expensive patients used the health care system. Emergency department visits fell by 49 percent.

On average, the program generated about $3,000 in savings per patient.

GROWING THE IDEA
Now, Oregon aims to bring an approach that worked in Bend to Medicaid’s 564,470 patients across the state.

Oregon divided the state into 15 regions and gave each one a set amount. These regions can divvy their dollars however they please, so long as patients hit certain quality metrics.

The hope is that each of the 15 regions, known as community care organizations, will invest only in the most cost-effective care.

A behavioral health worker who can prevent emergency admissions becomes a lot more valuable, the thinking goes, when funding is limited.

In this way, the Oregon plan has parallels to Republican ideas to “block grant” the Medicaid program, and give states a set amount of money. Both rely, in part, on a fixed budget to put downward pressure on health spending.

“You can call it what Oregon calls it, a global budget, or you can call it a block grant,” said Tevi Troy, assistant Health and Human Services secretary under George W. Bush. “There’s a semantic aspect to it. At the end of the day, we’re talking about putting limits on what we’ll spend on Medicaid.”

Democrats have typically opposed block grants out of fear that they could lead states to skimp on care to meet spending targets. But safeguards in the Oregon plan, like the quality goals, have made the approach more palatable.

“The idea of a global budget is to try to wring those costs without actually making consumers or seniors bear the heaviest burden,” said Neera Tanden, the Center for American Progress president, who has advised President Obama on health policy.

At the Mosaic Medical clinic in Prineville, a tiny central Oregon logging town of 9,192, Juana Martinez and Michelle Ortiz are practicing the type of medicine that Kitzhaber thinks could fix the system. They are community health workers, the ones who make sure that patients do not slip through the cracks.

“Back there, you just get patients’ vitals,” said Martinez, motioning toward the exam rooms. “Here, it’s more knowing about them and making sure you can help them.”

A BIG ENOUGH PIE?

Oregon Governor John Kitzhaber in the Governor's Office at the Oregon State Capitol in Salem, Oregon. [CREDIT: The Washington Post]

The governor’s gamble looms large for those who have to execute his plan: When you have a fixed number of health care dollars, who gets the biggest slice? The question weighs on the doctors at Richmond Clinic in Portland.

They are pleased about the chance to be paid for services they wouldn’t be paid for now, like a long talk with a patient about diabetes management.

“What we’re excited about, with this whole transformation process, is having the mental space and time to address our patients’ needs,” said Nick Gideonse, the clinic’s medical director.

“If we can get off the reimbursement system that is totally dependent on face-to-face visits, we might have more space to anticipate our patient's need, rather than respond to them as they happen.”

At the same time, others at the clinic worry about how big their share of the lump-sum payment will be.

“I’m reassured by people talking about the role primary care providers need to play,” said Ern Teuber, clinic executive director. “Still, when we start talking specific dollars, the perception is there isn’t enough money to go around and that somebody has to lose.” The worry is especially acute for the hospitals that tend to deliver more expensive types of medicine. Their business model has relied on keeping beds full, as each patient brought in new payments.

“If we can’t reduce the cost of hospital care, we become a cost center rather than revenue generator,” said Greg Van Pelt, chief executive of Providence Health. “If Medicaid is going to grow slower, you have to figure out a way to get it to cost less.”

Van Pelt's providers started a program to reduce elective Caesarean-section births before 39 weeks, which can lead to costly medical complications. Fewer babies ended up in neonatal care and, suddenly, a smaller neonatal staff was needed.

“There’s some tension since we haven’t figured out how the funding breaks down yet,” Van Pelt said. “Everyone is a little anxious.”

For Kitzhaber, the Medicaid experiment is just a beginning. If the state can achieve savings with this population, he could see using global budgets in the health plans that cover state workers and teachers. The private sector might get on board, too, if it sees proof that quality health care does not have to bankrupt employers.

“Medicaid by itself isn’t enough to change things,” he said. “For a lot of hospitals, it’s maybe 7 percent of their business. We have another 600,000 people the state covers. If their health-care costs grow slower, it’s just a game changer for state budgets.”

Last modified: September 30, 2013
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